Update: On March 17th, 2020 it was announced that due to the coronavirus COVID-19 outbreak, the IR35 reform has been delayed for one year until the 6th April 2021. Steve Barclay, chief secretary to the Treasury, said: “This is a deferral in response to the ongoing threat of Covid-19 to help businesses and individuals.”
In the 2018 Budget, the Government announced that the IR35 reform would come into effect in April 2020 2021. The IR35 reform already applies to the public sector, where the changes came into force in 2017. Are you ready?
Whether you’re a freelancer or contractor working through an intermediary, or a business owner who works with contractors through intermediaries, it’s essential for you to be aware of the changes. The difference in take-home pay for contractors whose work comes under IR35, versus contractors who don’t, is significant. So as well as compliance, businesses and contractors need to be prepared for the effect this will have on ongoing work, new contracts, and budgeting.
Who Is Affected By IR35
The changes to IR35 apply to you if:
- You’re a contractor who works through an intermediary, typically a limited company, and you provide your services to public sector organisations or medium or large-sized organisations even outside of the public sector
- Your business falls under the scope of a medium or large organisation and you hire contractors who work through an intermediary.
What Exactly is IR35?
The term IR35 refers to the UK’s anti-avoidance tax legislation and is also referred to as the off-payroll working rules. This legislation is designed to tax “disguised” employment, at a rate similar to employment, to prevent businesses from avoiding tax by hiring employees as contractors.
What Is Considered a Medium or Large Organisation by IR35?
From the 6th April 2020 2021, organisations that meet at least two of the following three criteria will be considered a medium or large organisation, and therefore need to comply:
- A turnover of more than £10.2 million
- A balance sheet total of £5.1 million
- More than 50 employees
The Effect on the Public Sector
Although the public sector already has reformed IR35 legislation in place, from 6th April 2021 there will be additional responsibilities to decide the employment status of a worker, which must be done for every contract you agree with an agency or worker.
Who Isn’t Affected By IR35
IR35 doesn’t apply to the self-employed, and it only applies to assessing the employment status of individuals working through an intermediary. This means that freelancers, consultants, locums, and contractors et cetera who are working as sole traders – with a direct relationship to the company who has hired them – aren’t under the scope of IR35. Other legislation than the IR35 comes into play if a sole trader is being treated like an employee, and those are matters that often get resolved in an employment tribunal.
IR35 also doesn’t introduce a ‘new’ tax. What has changed is who is liable for assessing the employment status of individuals working through their own limited company. Before, the intermediaries were responsible for assessing this – such as the agency or the limited company the individual provided their services through.
After the changes come into force, the medium and large businesses who hire contractors will be liable for making this assessment. The aim of the reform is to increase compliance with the rules that have already been in place, which determine whether a contractor’s pay should be taxed on a similar basis to employees.
What Determines Self-Employed or Employed?
The IR35 legislation, now and after the 6th April 2021, doesn’t mean that every contractor working through an intermediary will be taxed on a similar basis to employees. The rules apply when the terms of the engagement make it clear it’s an employee relationship rather than a self-employed one.
Common examples that determine employment versus self-employment include whether someone is expected to work onsite, whether they have regular/set hours, whether they get paid leave, whether they have other clients, and if the person is able to hire someone to do their work for them or not. If you’re unsure whether your contract terms outline employed or self-employed circumstances, we can help.
How Kidwells Solicitors Can Help
Understanding the scope of legislation can be daunting. We offer a comprehensive, flexible monthly package based on your employment and HR needs. With this ongoing package you can contact us to discuss your concerns and receive confidential legal advice to keep your business on top of the latest legislation. Call us at 01432 278 179 or email Kate Wargen, Head of Client Employment & HR, at kate.wargen@kidwellssolicitors.co.uk and ask us about Legal Shield.
To speak to accountants, our sister company Kidwells Bookkeeping has chartered accountants to offer specialist support to simplify the work of paying contractors in and outside of IR35. We always encourage getting independent financial or legal advice.